Supreme Court rules US LLCs can be treated as partnerships for UK tax

AMERICAN limited liability companies (LLCs) incorporated in the US can be treated for UK tax purposes as a partnership, following a landmark ruling by the Supreme Court.

The court decided that a UK-resident member of a LLC should be taxed by both the UK and the US on the same share of income and claim credit in the UK for US tax paid on the income.

The case, brought by Mr Anson – a member of HarbourVest Partners LLC which is registered in Delaware and carries out business in Boston, Massachusetts – had gone through various hearings at the first-tier tribunal, upper-tier tribunal and the Court of Appeal before reaching the Surpeme Court.

Anson was liable to US federal and state taxes on his share of the profits and remitted the balance to the UK, which was liable to UK income tax on the amounts remitted as “income arising from possessions outside the UK”.

During the period in question – April 1997 to April 2004 – he was resident but non-domiciled in the UK for UK tax purposes. He was liable to UK income tax on his UK sourced income and on foreign income remitted to the UK. He was non-resident in the US for US tax purposes, but was liable to US federal and state taxes on his US-sourced income.

HMRC held Anson was not entitled to any double taxation relief on the basis that the income that had been taxed in the US was not Anson’s income, but that of the LLC.

However, the court unanimously allowed Anson’s appeal, with the leading judgment by Lord Reed, followed by Lord Neuberger, Lord Clarke, Lord Sumption and Lord Carnwath.

In passing judgment, Lord Reed said: “…Mr Anson was entitled to the share of the profits allocated to him, rather than receiving a transfer of profits previously vested (in some sense) in the LLC. It follows that his ‘income arising’ in the US was his share of the profits.

“That is the income liable to tax under UK law, to the extent that it is remitted to the UK. Mr Anson’s liability to UK tax is therefore computed by reference to the same income as was taxed in the US. Accordingly he qualifies for double taxation relief.”

Managing director of American Tax Returns David Treitel said the move would “delight many investors”.

“Unless HMRC want to spend time looking at every other State outside of Delaware and the specific wording of every LLC agreement, we should – at long last – have the same treatment of LLCs in both the UK and the US. Today’s ruling should also encourage business between the UK and US by providing clarity and certainty for tens of thousands of UK investors investing in the United States,” he said.